WHAT  SHOULD  BE  THE  ATTITUDE  OF 
THE  STATE  TOWARD  THE 
BUSINESS  OF  FIRE 
INSURANCE? 


& 


WILLIAM  T.  EMMET 

Superintendent  of  Insurance  of  the  State  of  New  York 


Delivered  at  Meeting  of 

National  Association  of  Local  Fire  Insurance  Agents 
in  Cincinnati,  Ohio,  on  October  15,  1913 


WHAT  SHOULD  BE  THE  ATTITUDE  OF  THE 
STATE  TOWARD  THE  BUSINESS 
OF  FIRE  INSURANCE  ? 


1  know  of  no  more  interesting  present-day  problem  than  that 
which  has  grown  out  of  the  efforts  that  are  now  being  made,  in 
many  parts  of  the  United  States,  to  fix  and  control  fire  Insurance 
rates  by  governmental  action.  Of  course,  it  is  only  a  single 
phase  of  a  very  large  movement  that  is  in  progress  throughout 
the  civilized  world  looking  toward  the  strengthening  of  govern¬ 
ments  in  their  powers  of  control  over  private  business.  But, 
from  certain  points  of  view,  the  business  of  fire  insurance  seems, 
in  a  very  particular  sense,  to  be  one  which  can  be  better  con¬ 
ducted  by  private  individuals  than  by  even  the  most  perfect 
governmental  machinery.  It  seems  to  possess  certain  features 
which  make  it  a  particularly  dangerous  field  for  the  people  in 
their  organized  capacity  to  attempt  to  enter.  A  good  many  kinds 
of  business  lend  themselves  quite  easily  to  the .  designs  of  those 
who  would  like  to  see  a  socialistic  State  established  here  with  the 
least  possible  delay.  The  idea  of  governmental  operation  pre¬ 
sents  no  insurmountable  difficulties  in  a  number  of  cases.  But  in 
the  case  of  fire  insurance,  our  present-day  reformers  and  radical 
thinkers,  bent  on  driving  private  capital  out  of  the  field  and 
leaving  this  in  the  exclusive  control  of  government,  are  confronted 
upon  •  the  threshold  by  unusual  obstacles  which  are  inherent  to 
the  business  itself,  and  few  suggestions'  have  yet  been  made,  of 
a  practical  nature,  respecting  the  manner  in  which  these  obstacles 
can  be  avoided.  Notwithstanding  all  this,  however,  it  is  no  over¬ 
statement  to  say  that,  at  the  present  time,  a  very  formidable  and 
aggressive  movement  is  on  foot,  having  for  its  ultimate  purpose 
the  virtual  transaction  of  the  business  of  fire  insurance  by 
government. 

What  is  the  peculiar  feature  of  the  fire  insurance  business 
which  makes  the  problem  of  State  participation  in  this  business 
a  more  difficult  one  than  the  corresponding  problem  in  the  case  of 
railroads,  for  instance,  or  of  water  companies,  or  of  telegraph 


3 


and  telephone  companies?  Well,  broadly  speaking,  what  I  refer 
to  is  of  course  the  fact  that  fire  insurance  has  always  been,  and 
must  always  he,  to  an  extent  not  approached  by  any  other  legiti¬ 
mate  business  I  know  of,  a  game  of  chance  pure  and  simple  —  a 
game  of  chance  in  which  men  who  are  qualified  by  temperament 
and  experience  to  play  it,  and  who  are  willing  to  risk  their  money 
in  it,  can  survive,  hut  in  which  none  hut  experts  can  with  any 
safety  engage.  If  it  were  not  that  the  word  has  acquired  a  sort 
of  invidious  meaning  which  makes  it  unsafe  to  use  it  in  connec¬ 
tion  with  any  legitimate  business,  I  should  be  inclined  to  use  the 
word  “  gambling  ”  in  trying  to  describe  the  exact  feature  of  the 
business  of  fire  insurance  that  I  am  referring  to.  It  would  be 
obviously  improper,  however,  to  attempt  to  completely  charac¬ 
terize  by  any  such  word  a  business  so  beneficial  to  the  entire 
world  as  the  business  of  fire  insurance  is  when  it  is  properly  con¬ 
ducted.  But  that  the  uncertainties  and  extraordinary  hazards 
which  attach  to  all  games  of  chance  enter  into  the  transaction  of 
this  business  to  a  very  remarkable  degree,  cannot  be  denied.  It 
is  this  element  in  fire  insurance  which  seems  to  require  that  it 
shall  remain  in  competent  private  hands  longer  than  most  other 
kinds  of  enterprise  —  for  I  am  assuming  that  all  of  us  will  agree 
that  the  State  is  no  fit  agency  for  the  transaction  of  business  into 
which  the  element  of  chance  and  guess-work  enters  to  any  abnor¬ 
mal  extent. 

How,  of  course,  the  attitude  of  fire-insurance  underwriters 
toward  governmental  activities  in  connection  with  their  business 
has,  to  a  large  degree,  been  influenced  and  controlled  by  the  cir¬ 
cumstances  to  which  I  have  referred.  Broadly  speaking,  it  is  a 
very  different  attitude  indeed  from  that  which  has  been  adopted 
during  recent  years  by  the  leaders  in  the  life  insurance  field. 
Recognizing,  in  the  first  place,  that  their  responsibilities  are 
peculiarly  fiduciary  in  character  —  recognizing  also,  the  fact  that 
mortality  tables  have  made  their  business  practically  an  exact 
science  out  of  which,  when  properly  conducted,  the  element  of 
chance  can  be  kept  entirely  —  life-insurance  men  have  for  some¬ 
time  past  treated  the  whole  question  of  State  participation  in 
company  affairs  as  something  which  is  not  only  inevitable,  but, 
on  the  whole,  desirable  and  proper.  At  least,  they  have  not 


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4 


bitterly  contested  the  steady  growth  which  has  been  going  on  in 
the  powers  of  supervisory  departments.  In  the  case  of  fire  insur¬ 
ance,  on  the  other  hand,  nearly  every  step  which  has  been  taken 
in  the  direction  of  an  increased  governmental  control  over  the 
business,  has  been  sharply  opposed.  Particularly  has  this  been 
true  with  respect  to  legislation  affecting  that  most  occult  and 
difficult  branch  of  the  fire  underwriters’  art  —  namely,  the  making 
of  rates.  With  the  evident  fear  present  in  their  minds  that  even 
little  steps  by  the  iState  in  that  general  direction  can  mean  nothing 
but  a  dangerous  departure  toward  actual  governmental  rate¬ 
making  fire  underwriters  have  united,  on  more  than  one  occasion, 
in  opposition  to  efforts  which  legislative  committees  and  insur¬ 
ance  departments  have  made  to  ascertain  the  secrets  of  fire  insur¬ 
ance  rate-making,  in  so  far  as  these  are  ascertainable.  They  have 
protested  that,  in  the  very  nature  of  things,  fire  insurance  rate¬ 
making  cannot  be  reduced  to  an  exact  science,  or  anything 
approaching  one,  and  that,  therefore,  the  filing  by  fire  insurance 
companies  of  their  “  experience  ”  in  tabulated  form,  according 
to  some  uniform  system  —  or  any  of  the  other  similar  suggestions 
which  have  been  made  from  time  to  time  —  would  do  more  harm 
than  good  and  would  not  supply  the  public  with  any  real  informa¬ 
tion  respecting  the  manner  in  which  fire  insurance  rates  are 
arrived  at.  “  These  statistics,”  say  the  fire  insurance  under¬ 
writers,  66  when  kept  by  ourselves  according  to  our  own  system  — 
each  one  of  which  systems  differs  materially  from  the  systems 
employed  by  others  —  are  of  a  certain  amount  of  value  to  us  in 
determining  what  kinds  of  business  are  profitable  and  what  kinds 
are  not,  and  the  information  contained  in  them  is  used  by  us 
more  or  less  in  making  rates.  But  they  would  be  absolutely 
meaningless  to  the  general  public.  Standing  by  themselves,  they 
would  furnish  no  real  explanation  of  how  we  arrive  at  our  rates. 
In  fact,  we  don’t  ourselves  know  exactly  how  we  do  it.  What 
it  comes  down  to  is  this,  that  we  have  spent  our  lives  in  the  busi¬ 
ness  of  fire  underwriting,  and  in  consequence  are  experts  in  this 
business  —  and  after  we  take  into  account  all  the  statistical  ex¬ 
perience  at  our  disposal,  we  make  up  our  minds  what  rates  may 
safely  be  charged  in  any  line,  by  simply  using  the  best  judgment 
that  we  possess.  Precisely  how  we  do  it,  or  why  we  arrive  at  any 


given  result,  is  not  susceptible  of  exact  explanation.  Rate-mak¬ 
ing  is  a  fine  art,  in  other  words,  not  an  exact  science ;  and  the 
public  would  only  be  confused  by  the  filing  of  the  past  experience 
of  companies.  For  that  reason,  we  protest  against  any  such 
requirement.” 

This,  very  roughly  stated,  is  the  position  which  the  leading 
men  in  the  fire  insurance  world  have  been  taking  lately  in  refer¬ 
ence  to  the  proposal  which  the  Yew  York  Department  advanced 
about  a  year  ago  to  the  effect  that  the  “  experience  ”  of  the 
companies  should  hereafter  be  filed  with  the  Department  as  a 
guide  in  determining  whether  in  any  given  case  the  rates  charged 
were  fair.  Let  me  say  at  once  that,  personally,  I  sympathize 
with  their  attitude  to  a  very  considerable  extent,  because  I  have 
every  reason  to  believe  that  the  distinction  which  they  draw  be¬ 
tween  their  business,  as  a  highly  hazardous  calling,  and  the  busi¬ 
ness  of  life  insurance  for  instance  —  from  which  the  element  of 
chance  has  largely  been  eliminated  —  is  a  very  real  distinction,  and 
not  in  the  least  an  imaginary  one.  But  admitting  this  to  be  true, 
we  are  still  confronted  with  the  question,  what  the  proper  limits 
of  governmental  activity  are  in  connection  with  this  business, 
and  this  is  the  question  I  am  going  to  try  to  discuss  briefly  here 
to-day.  But  first  let  me  point  out  why  I  think  that  increased 
governmental  activity  in  connection  with  fire  insurance  rate¬ 
making  is  more  or  less  inevitable.  Llaving  done  that,  we  will 
take  up  the  further  question  what  line  of  governmental  activity 
should  be  followed  by  self-respecting  commonwealths,  in  reference 
to  this  matter,  during  the  coming  years. 

In  my  judgment,  increased  governmental  activity  in  connection 
with  the  fire  insurance  business  is  inevitable,  for  some  time  to 
come,  in  Yew  York  and  elsewhere — if  for  no  other  reason 
because  in  respect  to  fire  insurance,  as  in  respect  to  most  other 
kinds  of  business  activity,  the  world  in  its  progress  has  left  the 
age  of  competition  behind,  and  has  passed  into  an  era  when 
co-operation,  not  competition,  shall  be  the  controlling  watchword. 
This,  of  course,  is  not  literally  and  completely  the  situation  —  I 
am  endeavoring  merely  to  describe  the  tendency  and  the  drift  of 
things.  The  drift  in  the  fire  insurance  world  has  been  the  same 
as  elsewhere.  It  has  been  in  the  direction  of  doing  away  with 


the  sharp  competition  which  once  existed  in  the  business.  Now, 
if  there  is  one  thing  that  can  be  taken  as  absolutely  settled  in 
connection  with  the  trend  of  popular  thought  in  this  country,  it 
is  that  the  moment  competition  dies  out  or  languishes  in  any 
industry,  at  that  same  moment  a  demand  arises  that  the  govern¬ 
ment  shall  become  active,  either  in  supervising  or  conducting  the 
business  which  has  ceased  to  be  affected  by  competition. 

In  fire  insurance,  the  companies  commenced  some  years  ago  to 
co-operate  in  the  matter  of  rate-making.  They  did  this  by  means 
of  variously  devised  methods  of  organization  suited  to  the  pur¬ 
pose.  In  some  cases,  they  subscribed  to  cables  of  rates  made  up 
by  individual  experts  upon  supposedly  scientific  principles,  and 
agreed  to  be  bound  by  these  rates.  In  other  cases,  they  organized 
rate-making  bodies  of  their  own.  The  effect  in  either  case  was 
the  same,  in  that  the.  throat-cutting  competition  which  once 
existed  virtually  came  to  an  end. 

It  was  inevitable,  as  I  have  said,  that  this  tendency  should 
have  been  met  by  a  stirring  up,  throughout  the  United  States,  of 
popular  interest  in  the  question  what  effect  the  new  order  of 
things  was  going  to  have  on  fire  insurance  rates.  The  different 
positions  which  people  in  different  parts  of  the  country,  acting- 
through  their  legislatures  and  insurance  departments,  have  been 
taking  on  this  matter  shows  —  if  it  shows  nothing  else  —  how 
crude  and  unsettled  popular  thought  still  is  on  the  subject.  Cer¬ 
tainly  no  adjustment  of  the  situation  that  can  be  regarded  as  in 
any  sense  final  has  been  reached  anywhere.  In  some  places,  the 
popular  view  seems  to  be  that  this  tendency  toward  co-operative 
effort  upon  the  part  of  those  engaged  in  the  business  of  fire  insur¬ 
ance  should  be  combated  by  every  means  possible.  All  combina¬ 
tions  having  for  their  purpose  the  achievement  of  uniformity  in 
rates  between  the  companies  should,  in  the  opinion  of  some,  be 
legislated  against  and  broken  up.  Those  who  do  not  desire  to 
compete  should  be  made  to  compete,  whether  they  wish  to  or  not. 
If  they  refuse  to  compete  and  try  to  co-operate,  they  should  be 
sent  to  jail  and  their  business  should  be  taken  away  from  them. 
That,  I  say,  has  been  the  point  of  view  of  some.  It  is  not  mv 
point  of  view.  It  is  not  the  policy  which  has  found  favor  in  the 
State  of  New  York. 


7 


In  Hew  York  we  have  concluded,  on  the  whole,  that  the 
tendency  toward  co-operative  effort  between  the  companies  in  the 
matter  of  rate-making  is,  besides  being  inevitable,  a  tendency 
wholly  in  the  right  direction.  The  evils  of  the  old  unrestrained 
competition  were  many,  and  the  wastefulness  of  it  was  great. 
The  effect  of  it  on  the  solvency  of  the  companies  which  sold  the 
indispensable  commodity  of  insurance  to  the  public  could  not  help 
being,  in  many  cases,  disastrous.  Rate  wars  led  to  company  fail¬ 
ures,  and  company  failures  led  to  unsafe  insurance.  Under  the 
old  conditions  this  was  inevitable,  and  I,  for  one,  hope  never  to 
see  those  so-called  “  good  old  days  ”  return. 

But,  of  course,  with  the  passing  of  competition  the  people  com¬ 
menced  to  develop  a  curiosity,  which  has  ever  been  growing 
greater  instead  of  less,  as  to  how  the  more  or  less  standard  rates 
which  they  have  to  pay  under  the  new  system,  no  matter  what 
company  they  insure  in,  are  arrived  at.  If  a  man  can  go  from 
company  to  company  getting  the  lowest  rate  possible  for  the 
insurance  he  requires,  he  is  not  apt  to  care  very  much  how  the 
rate  is  arrived  at.  Why  ?  Because  he  knows  that  by  virtue  of  the 
mere  fact  that  competition  exists,  he  will  be  able  to  get  as  low  a 
rate  as  can  with  safety  be  granted  —  maybe  a  lower  one.  But 
when  competition  is  eliminated,  he  has  no  such  comfortable  assur¬ 
ance.  In  the  absence  of  it,  the  dread  spectre  of  a  grinding  and  all- 
powerful  monopoly,  dictating  for  purposes  of  private  profit  the 
raising  of  rates  to  an  exorbitant  figure,  inevitably  takes  possession 
of  the  average  man’s  mind.  To  whom  shall  he  turn  for  protection, 
he  asks  himself.  And  the  answer  of  course  is  —  to  the  State. 

Thus  in  Hew  York  and  elsewhere  we  were  compelled,  very 
shortly  after  the  tendency  to  which  I  have  referred  manifested 
itself,  to  consider  very  carefully  the  question  of  the  position 
which  the  State  should  take  toward  these  rate-making  combina¬ 
tions.  Should  we  try  to  break  them  up  by  law  and  restore  the 
old  conditions  ?  Or  should  we  recognize  the  fact  that  co-operation 
as  a  substitute  for  competition  is  both  inevitable  and  desirable, 
and  legalize  it  under  proper  restrictions  and  with  proper  safe¬ 
guards  ? 

Hew  York  decided  upon  the  latter  plan  and,  on  the  whole,  I 
think  the  results  thus  far  have  amply  justified  us  in  our  choice. 


8 


No  single  State,  of  course,  can  deal  unaided  with  the  problem 
of  fire  insurance  rate-making  and  hope  to  solve  it  completely. 
It  depends,  in  the  first  place,  upon  many  things  which  are  entirely 
beyond  State  control  —  upon  the  fundamental  morality  of  people, 
for  instance,  and  upon  special  conditions  which  exist  here  and 
there  and  which  no  legislation,  however  well  intended,  can  affect. 
But  beyond  all  this,  rates  in  any  given  State  are  necessarily 
affected,  in  large  measure,  by  the  laws  which  are  passed  in  the 
other  States.  As  the  result  of  its  entire  underwriting  each  com¬ 
pany  tries  to  make  money  for  its  stockholders.  If  through  re¬ 
strictive  legislation  it  loses  money  in  Kansas,  Kentucky  or 
Missouri,  for  instance,  it  naturally  seeks  to  recoup  itself  some¬ 
where  else.  Thus,  as  I  say,  the  question  is  a  national  one  and, 
in  the  very  nature  of  things,  cannot  be  dealt  with  satisfactorily 
by  any  single  State.  But  that  we  in  New  York  are  meeting  the 
difficulties  of  the  situation  in  as  satisfactory  a  manner  as  they 
can  be  met  under  the  circumstances,  I  think  I  am  perfectly  safe 
in  stating. 

What  we  have  done  in  New  York  is  simply  this:  We  have 
recognized  the  need  for  rate-making  associations,  and  have  ex¬ 
plicitly  legalized  these  organisms  so  that  they  may  transact  their 
business  in  the  open  and  not,  in  fear  and  trembling,  behind  closed 
doors.  We  have  placed  them,  together  with  all  their  ramifications 
and  feeders,  under  the  supervisory  jurisdiction  of  the  Insurance 
Department.  We  have,  in  addition,  passed  laws  forbidding  the 
making  of  discriminatory  rates  between  risks  of  the  same  class. 
We  have  given  authority  to  the  head  of  the  Insurance  Depart¬ 
ment  to  pass  upon  questions  of  alleged  discrimination  of  this 
character,  and,  if  he  finds  such  discrimination  to  exist,  to  forth¬ 
with  order  it  removed.  That  has  been  the  New  York  way  of 
dealing  with  the  situation  which  has  resulted,  in  the  fire  insurance 
world,  from  the  dying-out  of  the  old  thorough-going  competition 
between  the  companies  which  once  existed  in  the  matter  of  rates. 
And,  as  I  have  said,  it  has  proved  to  he  a  very  good  way  so  far 
as  it  goes.  It  has  enabled  us,  on  several  occasions  to  bring 
about  —  with  the  approval,  virtually,  of  the  companies  them¬ 
selves  —  large  reductions  in  rates  which  were  being  charged  in 
sections  of  New  York  and  other  cities  where  conditions  had 


9 


entirely  changed  since  these  rates  were  first  put  into  effect.  But 
for  the  power  which  any  citizen  has,  under  the  New  York  law, 
to  lodge  a  complaint  of  discrimination  in  such  cases  with  tlie 
Superintendent  of  Insurance,  these  antiquated  rating  schedules 
would  so  far  as  one  can  see,  have  remained  in  operation  in¬ 
definitely  —  largely  because  with  the  best  will  in  the  world  it  is 
humanly  impossible  for  the  rate-making  organism,  unless  prodded 
along  from  the  outside,  to  keep  abreast  of  the  changes  which  are 
occurring  constantly  in  the  territories  they  are  supposed  to  cover. 
Thus  it  came  about,  in  one  case  I  have  in  mind,  that  the  depart¬ 
ment’s  order  removing  an  obvious  discrimination  in  rates  against 
an  extensive  outlying  section  of  one  of  our  greatest  cities,  was 
hailed  by  the  companies  themselves  with  almost  as  much  enthusi¬ 
asm  as  it  was  by  the  inhabitants  of  the  region  benefited  by  the 
order  —  because  the  justice  of  the  finding  was  beyond  any  ques¬ 
tion  and  the  insurance  companies  realized  that  in  calling  it  to 
their  attention,  and  insisting  upon  prompt  action,  the  department 
was  really  doing  a  service  to  them  as  well  as  to  the  people. 

Am  I  not  justified,  then,  in  contending  that  excellent  progress 
has  been  made  in  New  York  toward  solving  the  difficult  question 
of  what  should  he  the  proper  relationship,  in  the  future,  between 
government  and  the  business  of  fire  insurance?  Infinitely  better 
progress,  at  all  events,  has  been  made,  I  am  certain,  than  would 
have  been  possible  had  we  gone  into  the  matter  from  a  different 
angle,  and  sought  to  annihilate  the  rate-making  bodies,  as  has  been 
attempted  in  some  of  the  States.  Nevertheless,  when  all  is  said 
and  done,  it  must  be  admitted  that  in  New  York,  as  elsewhere,  a 
feeling  of  suspicion  exists  in  the  minds  of  people  generally  that 
fire  insurance  rates  are  higher  than  they  ought  to  be.  Hand  in 
hand  with  this  suspicion  goes  the  demand  that  the  people  shall  be 
afforded  an  opportunity  —  by  studying  the  figures  showing  past 
experience  upon  which  present  rates  are  predicated  —  to  sit  in 
judgment,  as  it  were,  from  time  to  time,  through  their  proper 
representatives,  upon  the  question  whether  the  price  they  are 
paying  for  fire  insurance  protection,  now  that  competition  has 
been  eliminated,  is  a  fair  price  or  not.  And  he  would  be  a 
venturesome  prophet  indeed  who  was  willing  to  record  himself 
as  thinking  that  this  demand  will  speedily  die  out. 


10 


This  brings  me  to  the  point  where,  if  I  have  any  further  solu¬ 
tion  of  the  problem  than  the  one  now  on  trial  in  New  York,  it  is 
proper  that  I  should  divulge  it.  I  have  already  said  that  I  think 
that  the  New  York  method  of  handling  the  situation  has  been  a 
good  one,  so  far  as  it  goes.  I  am  not  yet  prepared  to  say  that  it 
does  not  go  as  far  as  need  ever  be  gone  in  the  direction  of  govern¬ 
mental  supervision  over  the  question  of  fire  insurance  rates.  The 
results  accomplished  so  far  have  been  satisfactory  enough  to  en¬ 
courage  the  hope  at  least  that,  with  further  trial,  the  present 
New  York  method  will  show  that  it  is  capable  of  meeting  all  the 
requirements  of  the  case.  But,  if  this  should  turn  out  not  to  be 
so  —  if  there  should  be  a  necessity  for  further  State  activity  in 
this  field  —  a  suggestion  has  recently  been  made  to  me  as  to  the 
direction  which  this  activity  should  take,  and  without  in  any 
sense  adopting  it  as  my  own  I  am  going  to  tell  you  what  it  is,  for 
whatever  it  may  be  worth.  I  hope  my  action  in  mentioning  it  at 
this  time  wifi  be  accepted  by  those  in  the  fire  insurance  business 
in  the  spirit  in  which  it  is  intended  —  that  is,  as  an  honest  and 
sincere  attempt  to  contribute  something  helpful  to  the  public  dis¬ 
cussion  of  an  exceedingly  intricate  and  troublesome  question. 

Insurance  departments  exist  primarily  in  order  to  insure  the 
solvency  of  insurance  companies  operating  within  the  jurisdiction 
of  these  departments.  Anything  which  it  may  be  necessary  to  do 
in  the  direction  of  State  activity  in  the  rate-making  field,  beyond 
what  has  already  been  done  in  New  York,  should,  in  my  judg¬ 
ment,  be  done  in  connection  with  the  performance  of  this  admitted 
and  well-recognized  duty  of  insurance  departments  —  namely,  the 
maintenance  of  solvency  among  the  insurance  companies.  The 
question  of  solvency  can  best  be  dealt  with  by  requiring  the 
maintenance  of  adequate  reserves  by  the  companies.  In  order  to 
know  whether  a  reserve  is  adequate  or  not,  it  is  necessary  to  know 
what  the  hazard  is,  or  in  other  words,  the  anticipated  loss.  The 
net  premium  rate  is  the  measure  of  the  hazard,  and  reserves 
should  be  based  upon  true  net  premiums.  Theoretically,  there¬ 
fore,  insurance  departments,  in  order  to  carry  out  their  primary 
purpose  of  safeguarding  the  solvency  of  companies,  should  not 
only  know  what  the  true  net  premiums  are  upon  which  the  com¬ 
panies  base  their  reserves,  but  should  have  the  equipment  for 


1 1 


determining  wliat  rates  may  be  justly  charged  by  the  companies 
in  order  to  maintain  solvency  and  insure  a  fair  return  upon  the 
capital  invested. 

I  believe  that  the  scope  of  State  authority  in  the  matter  of 
making  rates  should,  under  any  and  all  circumstances  that  I  can 
conceive  of,  be  limited  to'  the  field  outlined  above,  namely,  the 
safeguarding  of  solvency.  I  do  not  believe  that  under  any  con¬ 
ceivable  circumstances  the  State  should  undertake  to  do  anything 
in  the  direction  of  making  rates  which  it  shall  be  obligatory  upon 
insurance  companies  to  charge  their  customers.  But  I  know  that 
a  good  many  thoughtful  people  see  a  certain  virtue  in  the 
idea  that  it  may  prove  desirable  some  day  for  States  to  have 
something  to  say  about  the  making  of  the  rates  upon  which  the 
companies’  reserves  are  calculated  —  leaving  the  companies  then 
to  actually  charge  such  rates  as  they  see  fit,  so  long  as  they  reserve 
upon  the  rates  which  have  received  departmental  approval.  If 
State  rate-making  confines  itself  to  the  single  purpose  above  out¬ 
lined,  it  would  be  stripped,  they  say,  of  all  the  terrors  which  it 
now  has  for  the  men  who  are  leaders  in  the  fire  insurance  busi¬ 
ness  of  the  country.  Ho  strong  fire  insurance  concern  has  any 
objection  whatever,  so  far  as  I  know,  to  the  maintenance  of  any 
reserves  which  in  the  interest  of  safety  they  may  reasonably  be 
called  upon  to  maintain.  To  maintain  strong  reserves  —  even  to 
err  in  this  respect  upon  the  side  of  safety  —  takes  no  money  out 
of  the  companies’  pockets.  It  simply  makes  the  insurance  which 
they  sell  safer.  The  companies  might  under  certain  conditions, 
therefore,  have  no  serious  objection  to  State  rate-making,  if  the 
rates  so  made  were  made  for  no  other  purpose  than  to  calculate  safe 
reserves  upon  —  if,  in  other  words,  the  rates  so  made  were  not 
made  as  compulsory  rates  to  be  charged  by  the  companies. 

Does  the  question  of  State  rate-making,  viewed  from  this  angle, 
clear  itself  a  little?  Does  this  suggestion  point  to  a  wav  out  of 
existing  difficulties  and  uncertainties  ?  I  am  far  from  thinking 
that  immediate  steps  must  necessarily  be  taken  along  this  line. 
I  only  say  that,  if  the  agitation  in  favor  of  State  rate-making 
continues,  this  is  perhaps  the  channel  into  which  it  should  be 
directed  —  the  channel  into  which,  if  it  is  directed,  will  result 
in  the  maximum  of  good  and  the  minimum  of  harm  coming  to 


12 


the  business  of  fire  insurance  in  private  hands.  The  procedure 
would  be,  I  suppose,  that  the  rates  would  be  made,  in  the  first 
instance,  by  rate-making  bodies  or  bureaus,  as  at  present,  and 
submitted  to  the  Insurance  Department  together  with  the  classified 
experience  of  the  companies.  These  rates  and  schedules  would 
be  approved  by  the  department  upon  the  basis  of  a  study  of  col¬ 
lected  experience,  by  qualified  experts  in  the  employ  of  the  State. 
The  rates  so  approved  would  be  the  minimum  basis  for  reserves, 
but  in  no  other  sense  would  be  mandatory  or  binding  upon  the 
companies. 

Does  this  sound  revolutionary  or  dangerous  ?  It  is  not  so  in¬ 
tended.  At  all  events,  it  is  the  only  suggestion  I  am  able  to  make 
now  as  to  what  the  future  attitude  of  government  might  con¬ 
ceivably  be,  under  certain  circumstances,  toward  the  problem  of 
fire  insurance  rate-making.  I  shall  be  interested  to  see  what 
criticisms  it  calls  forth.  That  it  would,  if  adopted,  inevitably 
lead  to  a  larger  measure  of  supervision  and  control  by  government 
over  fire  insurance  companies  than  now  exists,  is  undoubtedly 
true.  I  should  be  the  first  to  regret  this,  because  I  am  so  incor¬ 
rigibly  an  individualist,  in  matters  of  this  kind,  that  I  continue 
to  believe,  with  Thomas  Jefferson,  that  the  least  governmental 
machinery  we  can  get  along  with,  the  better  off  we  will  all  of  us 
be.  I  approach  the  whole  question  of  Insurance  Supervision 
from  that  standpoint.  I  agree  that  we  should  have  just  as  little 
Insurance  Supervision  as  possible.  Where  I  differ  from  some  of 
the  men  who  are  now  active  in  the  business  of  fire  insurance  is 
merely  over  the  question  what,  under  existing  conditions,  the  least 
possible  measure  of  State  activity  in  insurance  matters  is.  I  am 
afraid  that  what  sufficed,  in  this  respect  during  the  days  when 
conditions  of  life  were  simple,  and  before  the  great  commercial 
and  social  developments  and  changes  of  the  present  time  had 
occurred,  no  longer  meets  the  needs  of  the  situation. 

To  recapitulate.  I  entirely  understand,  and  to  a  considerable 
extent  sympathize  with,  the  reluctant  attitude  of  the  older  fire 
insurance  men  toward  anything  which  savors  of  governmental 
aggression  in  their  chosen  field.  They  are  engaged  in  a  very 
peculiar  and  essentially  hazardous  business  —  one  in  which  expert 
knowledge  is  absolutely  necessary  in  order  to  succeed  —  and  I 


13 


do  not  in  the  least  blame  the  men  who  have  grown  gray  in  this 
business  for  viewing  with  alarm  the  increased  activities  of  the 
government  in  respect  to  their  affairs.  It  is  the  last  business  m 
the  world  that  the  people  ought  to  be  eager  in  their  organized 
capacity,  to  engage  in.  It  differs  altogether  from  life  insurance 
in  this  respect  —  although  I  do  not  want  to  be  understood  as 
favoring  State  insurance  in  the  life  field  either,  for  I  certainly  do 
not  favor  it.  But  the  time  has  come,  I  think,  when  broad-minded 
fire  insurance  men  must  recognize  the  inevitable  drift  of  things. 
They  must  view  their  problem  in  the  light  of  actual  conditions, 
not  in  the  light  of  conditions  as  they  would  like  them  to  exist. 
They  must  recognize  the  universality  of  the  demand  for  good 
cheap  insurance,  and  the  utter  dependence  of  the  people  upon  it. 
They  must  appreciate  the  truth  of  the  proposition  that,  after 
competition  has  died  out  in  any  branch  of  business,  and  monopoly 
reigns  in  its  stead,  the  only  direction  in  which  men  can  look  for 
protection  against  the  possible  abuses  attendant  upon  monopolistic 
conditions,  is  the  State.  Monopoly  having  to  a  greater  or  less 
degree  taken  the  place  of  the  old  competition  in  the  fire  insurance 
field,  the  leaders  in  the  fire  insurance  business  should  realize  that 
henceforth  they  must  adopt  a  different  attitude  toward  govern¬ 
mental  activities  in  connection  with  fire  insurance.  I  am  very 
sure  that  the  strong  men  who  have  performed  such  wonders  in 
this  useful  field  of  work  will  readjust  themselves  very  quickly 
to  the  new  conditions.  In  so  doing,  they  will  be  establishing 
additional  grounds,  besides  the  many  which  now  exist,  for  the 
praise  which  no  right-thinking  man  will  withhold  from  them 
for  all  the  splendid  results  they  have  achieved.  And  they  will 
be  taking  the  final  step  necessary  to  place  their  great  business  — 
without  which  the  affairs  of  the  world  could  not  be  carried  on 
at  all  —  upon  a  sounder  foundation  than  it  has  ever  yet  occupied. 


